* Dollar falls 1.1 percent versus basket of currencies
* Investors brace for more grim news on U.S. jobs
* Euro jumps 1 percent vs dollar, Swiss franc gains
* IMF official sees worst downturn since second world war
(Updates prices, changes byline, dateline; previous TOKYO)
By Jessica Mortimer
LONDON, March 6 (Reuters) - The dollar dropped more than one percent against a basket of currencies on Friday, reversing recent sharp gains as investors braced for data that is expected to show the U.S. jobs market took a severe knock in February.
Economists expect the U.S. economy lost a massive 648,000 jobs in February, with the unemployment rate seen rising to a 25-year high, but traders said talk that the figure could be as many as 1 million has hit the dollar hard.
Although recent bad economic news has tended to be positive for the dollar as investors have flocked to the perceived safety of the U.S. currency, analysts said investors' immediate reaction to talk of such a horrendous number was to sell it.
"The rumour of a very bad number for U.S. payrolls data in a normal world would be good for the dollar, but the knee-jerk reaction this time round has been to sell it," State Street currency strategist Lee Ferridge said.
He added that investors were squaring up positions ahead of the data after recent sharp gains that took the dollar index to a three-year high earlier this week.
At 0856 GMT, the dollar index fell 1.1 percent to 88.139 as the euro gained 1 percent against the U.S. currency to $1.2695.
The Swiss franc was a major gainer, with the euro tumbling to a four-month low against the currency, with analysts saying the Swiss unit has briefly resumed its safe-haven status amid intensifying concerns about a severe global economic downturn.
The dollar fell 1.3 percent against the Swiss franc to 1.1534 francs, while the euro was down 0.4 percent at 1.4639 francs, having earlier dropped as low as 1.4580 francs.
The yen also gained, with the dollar falling 0.7 percent to 97.27 yen and the euro losing 0.3 percent to 123.34.
ECONOMIC WOES
U.S. shares tumbled to 12-year lows on Thursday after General Motors said there were doubts about the heavyweight carmaker's viability
Global economic concerns intensified on Friday as a top International Monetary Fund official told a UK newspaper the world's developed economies were in the deepest slump since World War Two and warned the downturn could last into next year .
The comments come after the European Central Bank and the Bank of England cut interest rates to record lows on Thursday, with the UK's central bank resorting to unconventional measures to boost the supply of money in the economy.
In an accompanying press conference, ECB president Jean-Claude Trichet signalled further rate cuts and painted a bleak picture on the economy, with staff forecasting the euro zone may contract by more than 3 percent this year.
The U.S. payrolls data at 1330 GMT will be seen as a key gauge on the health of the world's largest economy and trading is expected to be very nervous ahead of the data.
"With that potentially significant non-farm payroll report still to come, further volatility could be seen well into the afternoon," CMC Markets analyst James Hughes said in a note to clients.
Analysts were unconvinced, however, that the latest move down in the dollar was an indication that the currency could be starting to lose its safe haven status.
"If the U.S. jobs data is really as bad as the speculation suggests then the reality is that it would very likely be dollar positive," State Street's Ferridge said.
(Reporting by Jessica Mortimer; editing by Patrick Graham)